international banking risk
1.Consider exchange rates for your country’s currency against that of its main trading partner over the last 10 years. What trends can you see and how might these trends affect your chosen firm and/or industry? [see http://www.x-rates.com]
Exchange rates come in two forms:
Fixed exchange rates, although they produce stability and predictability, tend to get in the way of market forces—if a currency is kept artificially low, a country will tend to export too much and import too little.
Trade balances and exchange rates. When exchange rates are allowed to fluctuate, the currency of a country that tends to run a trade deficit will tend to decline over time, since there will be less demand for that currency.This reduced exchange rate will then tend to make exports more attractive in other countries, and imports less attractive at home.
“Floating” —here, currencies are set on the open market based on the supply of and demand for each currency.
Do prices forecast exchange rates? using micro price data, Cumby (1997) found that prices of Big Macs forecast future exchange rate movements. Specifically, countries in which the exchange-rate-adjusted price of the Big Mac was high relative to a partner country in year t tended, on average, to experience a depreciation of its currency against that of the partner country in the subsequent time[-period. Similarly, IKEA has incentive to set its prices to account for expected exchange rate movements during the catalog year. If IKEA expects the U.S. dollar to depreciate against the Sw dish krona over the catalog year, then IKEA will set the US local currency catalog price high enough to offset the expected devaluation
2.In relation to exchange rates what is meant by the ‘law of one price’. To what extent might it affect your chosen firm and/or industry?
The Law of One Price
Definition of 'Law Of One Price'
The theory that the price of a given security, commodity or asset will have the same price when
Exchange rates come in two forms:
Fixed exchange rates, although they produce stability and predictability, tend to get in the way of market forces—if a currency is kept artificially low, a country will tend to export too much and import too little.
Trade balances and exchange rates. When exchange rates are allowed to fluctuate, the currency of a country that tends to run a trade deficit will tend to decline over time, since there will be less demand for that currency.This reduced exchange rate will then tend to make exports more attractive in other countries, and imports less attractive at home.
“Floating” —here, currencies are set on the open market based on the supply of and demand for each currency.
Do prices forecast exchange rates? using micro price data, Cumby (1997) found that prices of Big Macs forecast future exchange rate movements. Specifically, countries in which the exchange-rate-adjusted price of the Big Mac was high relative to a partner country in year t tended, on average, to experience a depreciation of its currency against that of the partner country in the subsequent time[-period. Similarly, IKEA has incentive to set its prices to account for expected exchange rate movements during the catalog year. If IKEA expects the U.S. dollar to depreciate against the Sw dish krona over the catalog year, then IKEA will set the US local currency catalog price high enough to offset the expected devaluation
2.In relation to exchange rates what is meant by the ‘law of one price’. To what extent might it affect your chosen firm and/or industry?
The Law of One Price
Definition of 'Law Of One Price'
The theory that the price of a given security, commodity or asset will have the same price when